Binary options glossary: The European Central Bank

The European Central Bank, also known as the ECB, was formed in 1998 and is headquartered in Frankfurt. La ECB sets monetary policy in the Euro zone and has several ways it can influence the economy, such as setting interest rates.

The European Central Bank is completely independent of political power: It’s objective is to ensure price stability (Article 105 of the Maastricht Treaty) and to maintain inflation below 2%. The institution is made up of a six-person executive that includes a President, a Vice President and 4 qualified individuals. The European Council appoints all. At the same time, the Governors of the Euro Zone Central Banks meet in Frankfurt every second Thursday of the month to set monetary policy.

The Board of Governors makes decisions involving two main criteria: One involves economic analysis, which relies upon macroeconomic data such as the exchange rate, growth, debt ratio and the deficit. These variables provide important indications about inflation. The Board of Governors relies also upon monetary analysis by overseeing monetary aggregates: the M3, which includes currency in circulation as well as short- and long-term savings.

Interest rates: The European Central Bank has three different interest rates to apply to monetary policy: the refinancing rate, the deposit interest rate and the marginal lending rate.
The refinancing rate: This is the main interest rate used to regulate economic activity. This rate determines the rate used by commercial banks when providing loans, and this refinancing rate is set daily and is a good indicator of the monetary market situation. In short, the refinancing rate is the cost of money. In case of economic crisis, the ECB will lower the refinancing rate to encourage commercial banks to lend more money. In the opposite situation when there is strong inflation, the rates are increased in order to reduce inflationary pressure.

In addition to the refinancing rate, the ECB also determines the deposit interest rates, which correspond to the bank’s reserve requirements. In fact, banks must maintain profit reserves in accordance with ECB conditions. The ECB also sets the marginal lending rate, which is the interest rate for short-term loans.

Use when trading binary options: Following the ECB’s decisions is a valuable way to determine currency prices on the Forex. Don’t hesitate to follow economic and financial news at the same time in order to trade binary options on the Forex in the best possible conditions.


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